Facing Slowdown, PC Makers Hunt New Markets
Ventures Include New Platforms, Services
from Bloomberg News
SAN FRANCISCO (May 21) -- For personal computer makers, the machine that launched the technology revolution and enriched hundreds of companies is looking played out.
With machines costing less than $1,000 flooding the market, the biggest PC makers are heading for higher ground. Dell Computer Corp., Compaq Computer Corp., and Intel Corp. -- the company that makes the brains of most PCs -- are all taking steps away from the PC business.
They're bracing for the day when the PC, like the television before it, becomes a commodity product with profit margins of 10 percent or less -- half as much as today. Already, the only way PC makers can boost sales and earnings is by swiping customers from rivals.
''It's a bad business,'' said Patrick Adams, who manages $1.6 billion at Berger Associates in Denver, and who recently sold 500,000 Compaq shares. ''It's going to be real tough for anyone to make money.''
To try and cushion any blow to earnings, Dell decided to team with International Business Machines Corp. to get the parts it needs to build high-powered computers and data-storage devices. Compaq tried a different tack and bought Digital Equipment Corp. to expand into the business of setting up and maintaining big computer systems. Intel, the world's biggest maker of PC microprocessors bought a maker of communications chips.
Even Microsoft Corp.'s Bill Gates, who became the world's richest man by making software for PCs, is looking beyond the desktop machines and is developing software for servers that run the Internet as well as hand-held electronic personal organizers. He's also betting on cable-television, and earlier this month agreed to invest $5 billion in AT&T Corp., gaining the right to install Microsoft software on set-top boxes that AT&T will use to offer TV and Internet access.
Sales Slump
It's easy to see why the PC industry is nervous. PC makers' sales fell 4.1 percent last year to $147.6 billion from $153.9 billion in 1997, mostly because of price cuts, according to market researcher Dataquest in San Jose, California.
Things are so bad that IBM had a pretax loss of almost $1 billion in its personal computer business last year, prompting Chief Executive Lou Gerstner to say that the ''PC era is over.''
The news on PCs has been better in the past few weeks. IBM said PC sales rose 50 percent in the first quarter. And Apple Computer Inc., maker of the iMac computer, said earnings rose a better-than-expected 69 percent to $93 million in the March quarter. Hewlett-Packard Co., said PC sales rose 36 percent in the fiscal quarter ended in April, and that it made money on those sales. A year earlier, it lost money on PCs.
Still, IBM had a pretax loss of $89 million on PCs in the quarter, and analysts wonder how long Apple will be able to charge premium prices for PCs aimed at first-time users just because the plastic exterior is curved instead of angular and comes in blue, green and other colors.
''Design and packaging are important, but so is price,'' said Walter Winnitzki, an analyst at Hambrecht & Quist, who rates Apple ''market perform.'' ''Apple is exposed to the impact of $500 computers.''
Trouble Adapting
Computer makers have a spotty record of coping with market changes. Most of the mainframe computer makers that flourished in the early 1970s -- NCR Corp., Burroughs Corp., Sperry Corp. and Control Data Corp. -- failed to adapt when minicomputers came along.
Companies that made minicomputers, midsize computers that performed many of the functions of older mainframes, had a pratfall of their own when the PC era arrived. Digital, a minicomputer power in the 1980s, racked up almost $6 billion in losses from 1991 to 1996.
The same fate may befall PC makers.
''History suggests that they will fail,'' said Fred Hickey, editor of the High-Tech Strategist, who's been advising readers to avoid shares of PC makers for many months.
Betting on Services
Several big PC makers have high hopes for services, which can include anything from setting up computers to providing Internet access. They hope to match IBM's record of 20 percent annual revenue gains in the business.
It's a market with plenty of appeal. Dataquest expects worldwide revenue for services to double to $800 billion in 2003 from $400 billion today, rising about 14 percent a year, compared with 6.4 percent annually for computer hardware.
Another inviting market is data storage, and Compaq and Dell, are pushing into the market for machines that warehouse billions of bits of information. They hope to replicate the success of EMC Corp., the industry leader and third-best performing stock in the Standard & Poor's 500 in the past three years, with a 10-fold gain. Dell was No. 1, with a 44-fold gain in that stretch.
Transformation
No company is more intent on transforming itself than Compaq, the world's top PC maker, and the one with the most at stake.
The Houston company started in 1982 by making clones of IBM PCs. Twelve years later, it took over as No. 1 in the business.
Compaq took a big step beyond the PC market in 1997, when it bought Tandem Computers Inc., a maker of high-performance computers. Then last year, it bought Digital for $8.7 billion, which had once challenged IBM with a full line of computers ranging from mainframes to laptops.
So far, those investments, particularly Digital, have been a dud. Last month, Compaq reported a first-quarter profit of $281 million, far short of forecasts. Compaq's board pinned the blame on its top executive, firing CEO Eckhard Pfeiffer.
The Digital piece of Compaq ''is not doing as well as expected,'' said portfolio manager Duane Eatherly of Banc One Investment Advisors, which owns 1 million shares of Compaq.
Even chipmaker Intel is backing away from its reliance on the PC market, which accounts for 80 percent of its $26 billion in annual sales.
Analyst Nathan Brookwood at Insight 64, a Saratoga, California-based market research firm, expects the microprocessor market to grow 12 percent a year -- half as much as Intel's average annual sales growth of about 25 percent.
''They need new markets,'' Brookwood said.
In March, Intel made its biggest acquisition ever, paying $2.11 billion for Level One Communications Inc., a maker of chips used in computer networking equipment.
Internet Foray
In a bolder move, Intel plans to start hosting Web sites for companies like Internet directory Excite Inc. Eventually, Intel plans to have centers around the world, full of powerful computers, maintaining Web sites 24 hours a day.
The chipmaker also created a unit to build new devices to get on the Internet, such as electronic tablets and TV set-top boxes, technology that may one day supplant the PC.
''This group is unencumbered by the PC legacies that the rest of the company has to carry,'' Intel CEO Craig Barrett told analysts at a meeting in New York last month.
Even Dell, the No. 1 direct seller of PCs, is branching out, and with good reason. Dell's sales growth has been slowing for two quarters now. Sales grew 41 percent in the quarter ended April 30. Though impressive compared with rivals, that's down from an average 54 percent in the previous eight quarters.
In March, Dell said it would buy $16 billion of computer parts from IBM during the next seven years. Many of the components will go into storage devices and high-powered servers. Dell already makes some of those machines and wants to offer more powerful machines that command even higher prices.
''Dell recognizes that its growth rate is slowing down, and that it needs to diversify the product line,'' said U.S. Bancorp Piper Jaffray analyst Ashok Kumar who rates Dell a ''buy.''
Companies that lack a plan for dealing with falling PC prices get punished.
Shares of Micron Electronics Inc., a Nampa, Idaho, PC maker that sells directly to consumers, have fallen by a fourth this year. The company has reported $219 million in losses during the past four quarters.
Advanced Micro Devices Inc. shares have tumbled as well, dropping 30 percent this year, after the chipmaker reported a $128 million first-quarter loss. Unlike Intel, Sunnyvale, California-based AMD doesn't make chips for higher-powered computers, depending solely on the PC market.
These days, counting on the PC may be an indulgence few high- tech companies can afford.
May/21/1999 10:35
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